Systemic deficiencies breed bad loans at SBS

83% of the Cash Credit/ Overdraft loan accounts at State Bank of Sikkim are Non-Performing Assets!

The banker to the Government of Sikkim appears to be in urgent need for some banking lessons given its penchant for accumulating non-performing assets against cash credit and overdraft loan accounts. State Bank of Sikkim, established as the banker to the GoS by a royal proclamation in June 1968, was studied by auditors from the office of the Accountant General [Audit] as they tried to find out the reasons for accumulation of NPA’s against CC and OD loan facilities. Their findings are included in the Report of the Comptroller and Auditor General of India on Social, Economic, Revenue and General Sectors for the year ended March 2014. The report was tabled by the Chief Minister during the Legislative Assembly’s last sitting in end-March. It appears that the bank has been getting banking basics wrong by advancing cash credit and overdraft facilities without obtaining adequate collateral security or undertaking verification and evaluation of mortgaged properties or bothering with monitoring recovery of dues.
CAG’s attention to the SBS propensity for NPA’s was invited when it was noticed that as of March 2013, SBS had disbursed CC and OD amounting to Rs. 168.64 crore to 448 loanees. CC and OD facilities are important loans to support the contract and supplies sector, but before one can congratulate SBS on its efficacy, comes the revelation that 83% of these loans, amounting to Rs. 128.09 crore and involving 372 loanees had become Non-Performing Assets [NPAs] as of March 2014!
The understand why this was happening, CAG auditors analysed a sample of 25 out of 372 NPAs amounting to 30% [Rs. 38.01 cr] of the NPA of Rs. 128.09 cr. The findings make for interesting reading.
Overdraft facilities are normally extended to customers [mostly contractors and suppliers] against department work orders after obtaining collateral security of landed properties valued at double the OD limit. The OD limits can be enhanced subsequently subject to commensurate enhancement in the value of the collateral securities. These are the rules; but CAG examination of records at SBS revealed irregularities which encouraged defaulting by the loanees.
CAG checked application of these rules against overdraft facilities enjoyed by five Non-Performing Assets which had availed the OD facilities between March 2004 to December 2008. All five were contractors. Between the five, they took out ODs amounting to a collective Rs. 10.20 crore. Against a security value requirement, as per rules, of Rs. 20.4 cr, the security value held by the bank was only Rs. 12.83 cr. Total outstanding receivable from the five accounts, as of June 2014, stood at Rs. 14.21 cr, Rs. 1.38 crore more than the value of securities being held by SBS.
Interestingly, the SBS management, when asked to explain this by CAG, stated that there were no guidelines or policy directions to obtain securities valuing double the amount of CC/OD. They argue that mortgages are additional security since the hypothecation of bills receivable of the contractors are the primary security. CAG has rejected this excuse pointing out that SBS has been consistently following the double value rule in most cases. “Further, recovery of CC/ OD dues out of contractors’ upaid bills is also subjective depending upon timely and successful execution of works by contractors,” the CAG Report details. The latter is a valid point because CAG findings revealed an instance when a contractor who had taken out a Rs. 2.50 crore OD in December 2008 had been blacklisted by the concerned Department and his contract cancelled in Feb 2013 due to slow progress of work. As of June 2014, total outstanding balance from the said loan account was Rs. 3.61 crore.
Even if the mortgage value was double the CC/ OD amount on papers held by SBS, there is no guarantee that this would be the value on location. SBS, it appears, has no mechanism for pre and post inspection of property mortgaged, as result, there have been instances of cross-mortgage and even mortgage of non-existent property!
In May 2007, SBS sanctioned a Rs. 1 crore OD amount to a government contractors against mortgage of properties worth Rs. 2 crore belonging to four people. One of the properties in question claimed to be a four-storied building [valued at Rs. 49 lakh]. On default of repayment, SBS in reported to have conducted verification of said property only to realize that there was no four-storied RCC building where it was claimed to be… the property was not traceable!
Then there is the curious case where SBS sanctioned a Rs. 3.30 cr CC facility to a company for a Rs. 11.50 cr work order from PHE Department. This has become an NPA with the total overdue CC amount along with interest standing at Rs. 4.74 cr. The company had mortgaged a property situated outside Sikkim valued at Rs. 4.15 cr. The mortgaged property was however not registered in favour of SBS and SBS had neither registered the equity deed nor incorporated any terms and conditions for insurance of mortgaged properties. “Thus, due to negligence in ensuring proper securities at the time of sanction of OD facilities, the financial interest of the Bank could not be safeguarded causing recovery of entire dues of Rs. 4.74 crore doubtful,” the report puts on record.
It appears, that as per the policy of SBS, CC/ OD facility is provided to customers only against work orders awarded by government departments. The recoveries of dues against such CC/ OD are secured through payments to be released by the concerned departments enrooting through the CC/OD accounts of the loanee. But then, like with all other practices in connection with CC/ OD loans, even this is very slackly, if at all, monitored. In one NPA, an OD was sanctioned for works, one of which was a centrally-sponsored scheme, the payment [to the contractor] for which was routed through a nationalized bank. SBS did not take up the matter of channelizing the payment through its OD account either with the loanee or the nationalized bank as a result of which it could not recover unpaid dues out of payments released to the contractor.
Slack monitoring is also highlighted by the fact that in the case of three [out of 25] non-performing overdraft accounts, even after a lapse of nine years, SBS neither ascertained the status of works nor pursued with the concerned department to find out whether the works have been completed or abandoned by the contractors.
Interestingly, none of the 25 NPA cases analysed by CAG had been processed under Sikkim Public Demands Recovery Act by SBS for recovery of outstanding dues. As per the SPDR Act, an application is to be filed by SBS before the Certificate Officer for recovery of its dues. In July 2014, the SBS management explained that the bank was making “all-out” efforts for recovery and that notices in the local media were also being issued to urge defaulters to pay up their dues. “Thus, deficiencies in the system of appraisal of securities, lapses in monitoring the works and non-initiation of legal course of action of recovery of dues, etc. led to accumulation of NPAs against CC/ OD loans,” the CAG Report deduces.